The Role of Resources in Success and Survival of a New Venture - Literature review Example

Management skills and entrepreneurship Introduction An entrepreneur creates a new venture solely for the purpose of earning profit. The venture should be capable of exploiting various opportunities so that sales volume is increased and positive cash flow is recognised. However, considerable obstacles can be faced by organisations in process of recognition and exploration of growth opportunities, as indicated by various studies which highlights high failure and marginal survival of new ventures. Cooper, Gimeno-Gascon and Woo (1991) determined that about 36 percent of new business ventures failed and 50 percent pulled through marginally and only 14 percent witnessed rapid growth. Accordingly, exploration of hindrances in growth opportunities became a critical subject for most entrepreneurial researches (Shane and Venkataraman, 2000). In this context Shelton (2005) has proposed the concept of scale barriers to shed some light on the issues related to growth of new venture. Primarily, there are three kinds of resources that are necessary for growth of a firm, namely, financial resources, competitive position and management and organisational capability. Start-up firms are generally small in size and practically inexperienced in an industry. Consequently, they experience resource deficiencies in various functional areas due to small size and lack of sufficient knowledge of the industry. Shelton (2005) defined all these deficiencies as scale barriers which have significant negative impact on growth of new firms. Therefore, growth in new ventures can be illustrated as a process of conquering various scale barriers that develop as a result of liabilities such as newness and smallness. Inexperienced position and small size of start-up firms can be related to resource deficiencies, whose dimensions are not only limited to ignorance but also include lack of key strategic and organisational resources (Shepherd, Douglas and Shanley, 2000). The authors proposed a model where they suggested that an entrepreneur generally influences growth of a new venture on the basis of limited yet critical resources while the unavailable resources are listed as additional scale barriers. The entrepreneur needs to overcome these barriers to establish a mature and successful organisation (Shepherd, Douglas and Shanley, 2000). Author such as Singer (1995) presented a triad of causal constructs of success and failure of a new venture in this regard. However, it was gathered that most scholars primarily focused on managerial and environmental aspects of the triad and ignored the structural aspect. Singer (1995) and Fichman and Levinthal (1991) explained that it is important for a start-up firm to address the structural issues so as to avoid additional challenges related to newness and small size. The following section discusses key literature related to growth of new venture and scale barriers. Literature review Entrepreneurial growth scholar may ignore the liabilities associated with newness and smallness of a venture but survival of a new venture is a subject of extensive study among scholars of venture mortality. The ability of an entrepreneur to intervene and improve the process of development and survival of a business is a subject of debate among most academicians. Authors such as Singer (1995) and Hannan and Freeman (1989) postulated that development of new ventures bears significant similarities with the biological development where none can make sufficient effort to minimise the likelihood of failure. However, authors such as Burns and Wholey (1995), Miner and Haunschilde (1995) and Davis (1991) argued that probability of failure of a new venture can be minimised by acquiring and disseminating information and through organisational learning. The difficulties related to growth of new venture have resulted in consideration of a number of scholarly articles with respect to the subject of the paper. Most of the early works are prescriptive in nature as they focus on either describing the determinants of success in new venture or measures entrepreneurs should adopt to mitigate difficulties associated therein instead of examining the process of growth. It was observed that over the time complexity in growth models have increased rapidly as different authors proposed a variety of models for studying the individual, environmental and organisational characteristics but little attention has been paid to recognise various underlying aspects of the actual growth mechanism of the ventures. Those researches that addressed the growth process viewed expansion of new ventures as driven by management processes and internal needs such as overcoming managerial crises (Greiner, 1972, 1998), examining impact of knowledge and information on multiple combinations of resources (Galunic and Rodan, 1998) and management of increased complexity (Covin and Slevin, 1997). An extensive study of various literatures on development of new venture revealed that most authors focussed on evaluating complexity and scope of tested models instead of describing the growth process. Additionally, the earliest literatures by Baumol, BrocKhaus, McClelland, Schumpeter and Van de Ven focused more upon characteristic features of entrepreneurs as key determinant of performance and development of new venture (Shelton, 2005). Subsequently, the role of industry structure in growth of start-up firms was introduced through the means of entry barriers by authors such as Harrigan (1981) and Yip (1982). Authors such as Sandberg and Hofer (1987) also made significant contribution in this regard and proposed a model that defines performance of a venture as a function of entrepreneurial activities, strategy and industry structure. The Sandberg and Hofer model along with works of Abell (1980) and Romanelli (1989) recognised role of industry structure in growth strategy of new ventures. These authors spawned additional works for examining various multilevel models based on individual, environmental and organisational dimensions and venture strategies of new start-up firms. The ascendance of resource base approach to firm has caused examination of role of various resources in success of a new venture by entrepreneurship scholars such as Chandler and Hanks (1994) and Brush and Chaganti (1999). A number of authors such as Chrisman, Bauerschmidt and Hofer (1998) extended the original Sandberg and Hofer model to include resources and determined that besides the skills and knowledge of the entrepreneur or founder of the start-up venture, other resources are equally necessary. The convergence of resource based view and structural dimensions of Singer’s triad of causal constructs deriving from the liabilities associated with smallness and newness of a new venture through the notion of scale barriers can be presented in two manners in various literature related growth of new venture. Firstly, the concept provides a base for examining the growth process and various resources that will be necessary for development of the venture. Secondly, the notion reveals that challenges associated with growth and survival are elements of same continuum as it illustrates the role of the earlier mentioned liabilities in the progress of the new venture (Shelton, 2005). Scale barriers comprise various resources that a start-up firm requires for striving horizontal growth within an industry. Authors such as Davidsson, et al. (2002), Man, Lau and Chan (2002) and Brush (2001) identified various resources that at mostly relevant for growth of a new venture and classified them in three categories namely financial capital, competitive capabilities and management and organisational skills; lack of these factors result in development of respective scale barriers or deficiencies as represented in appendix 1 and 2. Additionally, the strong correlation between newness and smallness of a venture has been already discussed in the paper. In the figure 1, it was observed that small yet established firms and large but new organisations are prone to only one of these two issues while new and small organisations are prone to both issues. Figure 1 (Source: Shelton, 2005) In this regard, the three important scale barriers have been discussed in a detailed manner so that a new venture can take the shape of an established firm through carefully managed and leveraged initial endowment. Competitive deficiencies The strength of a firm’s competitive position plays a crucial role in its growth and helps it in developing an edge over its competitors, which is necessary for acquiring consumer base and increasing revenue. Man, Lau and Chan (2002) demonstrated that competitiveness is a critical component regarding performance of small and medium firms. Authors such as Khan, MacMillan, Zemann and Narasimha and others emphasised on a role of working product model and well-defined competitive advantage for strong positioning of a new venture in the marketplace. Several authors agree that relatively unsuccessful competitive position of a new firm can result from new market and relative small size. Newcomers in an industry face certain difficulties in establishing its position due to lack of competitive strength and sufficient market information. According to Shepherd, Douglas and Shanley (2000), a new firm can deliver an outstanding product or service but potential consumers may not buy it due to lack of sufficient information regarding the same and inability to determine the distinguishing point of the product from that of its competitors. Financial Deficiencies According to Brush, Greene and Hart (2001), financial capital can be described as a kind of instrumental resource which is considered essential because it enables a firm to have access to other key resources necessary for continuing the venture. Riquelme and Watson (2002) pointed out that high growth of a venture is not only driven by adequate financial resources but also by inclusion of wide variety of the same therein. Additionally, authors such as Bruderl and Schussler (1990) demonstrated that relatively new firms with greater access to vast financial resources exhibit more likelihood towards survival. Singer (1995) explained that young firms should be able to weather various internal issues and environmental downturns so that the process of maturity is achieved smoothly. Various authors advocated that in absence of organisational legitimacy, financial inflow of a new firm may feel restricted due to lack of operating history and limited organisational reputation. Hybels (1995) proposed that weak exchange relationship with various financial communities may obstruct the ability of a new venture to gather fund. In this regard, Shane and Stuart (2002) commented that strong pre-established relationship with venture capitalists and financial communities can prove beneficial for a start-up firm in term of fund arrangement. Management and organisational deficiencies It has been already observed that authors such as Bruderl and Schussler (1990) focused on issues related to internal coordination as an important aspect of liabilities associated with newness. Furthermore authors such as Riquelme and Watson (2002) emphasised on role of organisational capabilities and managerial practices on growth of new venture. Information structure, knowledge base, organisational routines, creation of job roles and coordination are some of the important organisational resources new ventures should acquire. Shepherd, Douglas and Shanley (2000), in this regard, advocated development of appropriate organisational structure so task recognition and their execution are conducted smoothly. Singer (1995) added that lack of an efficient organisation structure may result in wastage of resources and mismanaged opportunities there new ventures must accommodate organisational learning in order to establish an appropriate structure. It has been observed that small firms are generally vulnerable to various organisational weaknesses including leadership due to lack of redundant production, depth in management structure and organisational processes. Likewise, small firms generally depend significantly on few clients instead of a large consumer base which again can have negative impact on its existence (Shelton, 2005). Role of scale barriers in growth of new venture Figure 2 (Source: Shelton, 2005) The model presented in figure 2 shows the structure that a new venture should adopt while undertaking expansion. The model represent scale barriers and their role in hindering growth of nascent firms and the way firms can surmount the same. According to certain authors, the conditions of a particular industry have a significant impact on the size of the existing scale barriers thereof. Studies suggest that some industries require new ventures to invest in resources higher than that in other industries. Initial endowment and resource building strategy of a venture determines the size and nature of its acquired resources and thereby the ability of the business to overcome its scale barriers. Venture endowment Every venture is started with a set of initial resources or endowments which it uses to create product or service offerings for sale. Studies suggest that these resources are generally accumulated by the founder during the initial phase of business formation and comprise management team members, other employees, knowledge transfer, relationships and experiences, financial capital and venture business model. Any new venture with strong initial endowments face comparatively less scale barriers as it helps the business in developing strong exchange relationships with external resources and enhances the organisational legitimacy of the firm (Brush, Greene and Hart, 2001; Bruderl and Schussler, 1990; Shane and Stuart, 2002). Resource accumulation strategies Resource accumulation or development strategies consist of various techniques that help a new venture in gaining critical resources that may prove helpful in developing strategic position of the venture. Dierickx and Cool (1989) explained that strategically important resources are generally developed by a firm internally; however, Chi (1994) in this context explained three kind of trading. These strategies are purchasing or acquisition strategies, alliance or partnership strategies and internal development strategies. Industry conditions Authors such as Davidsson, et al. (2002) advocated that while initial venture endowments and resource development strategies are useful for overcoming scale barriers, industry conditions are heavily responsible for determining size and characteristics of various scale barriers. Studies suggest that liberal business environment result is high growth of a particular industry. Authors such as Begley, Tan and Schoch (2005) determined seven key factors that have significant impact on industry conditions, namely, available financing, market opportunities, supportive government regulations, access to support services, social connections, skilled labour supply and competitive conditions. Overall, the size and impact of scale barriers on a new venture depends heavily on the above mentioned three factors. Conclusion The paper is a critical analysis of the fact that even though entrepreneurial activities and new ventures are started with limited resources, their survival heavily depends on several other resources which are not easily accessible. The paper extensively evaluates various literatures and scholarly articles in this regard as well as has considered viewpoint of numerous authors to understand role of resources in success and survival of a new venture. It was ascertained during the literature review that resources that are critical for a venture and are easily not available to the entrepreneur, are generally referred as scale barriers. However, the concept of scale barriers is comparatively complex as it is influenced by a number of other factors. Primarily, the internal factors that act as liabilities to a new venture are its newness to a market and its relative small size compared to that of the existing competitors in an industry. Additionally, industry conditions have a significant role in determining the size of scale barriers. It was gathered in the paper that initial endowments and resource accumulation strategies plays a positive role in the survival of a new venture in an industry. Most authors in the studies related survival of a new venture will respect to the ability of the venture to accumulate various kind of resources such as financial capital, social relationship, experience, manpower and skill and knowledge. 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International expansion by new venture firms: International diversity, mode of market entry, technological learning, and performance. Academy of Management journal, 43(5), pp. 925-950. Appendix Appendix 1 Appendix 2 Read More